US Economic Growth Beats Forecasts

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, on Oct. 3, 2018. (Reuters/Brendan McDermid)

WASHINGTON—The U.S. economy expanded at a 3.5 percent annual rate in the third quarter, as consumer spending strengthened. The growth came in above the Wall Street expectation of 3.3 percent.

According to the “advance” estimate released by the Commerce Department on Friday, the main drivers of growth in the third quarter were personal consumption expenditures, private inventory investment, and government spending.

While the reading came lower than the 4.2 percent pace in the second quarter, it still marked the strongest back-to-back quarters of growth since 2014.

“Today’s 3.5 percent GDP print slightly beat estimates and, similarly to the 4.2 percent Q2 print, this is because still-easy monetary conditions were mixed with a heavy dose of fiscal stimulus,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.

Consumer spending, which accounts for about 70 percent of the economy, recorded a 4 percent increase, highest since the fourth quarter of 2014. And the government spending surged 3.3 percent—highest since 2016. Inventories had the highest contribution to the GDP since early 2015.

These gains helped offset the drag from trade. Exports declined by 3.5 percent and imports increased by 9.1 percent in the third quarter.

The housing sector was also a weak spot, with a contraction of 4 percent. This was the third consecutive decline. According to analysts, the industry is slowing amid higher prices and rising mortgage rates.

“The report shows strong growth still on trend with consumption better than expected. Housing remains a drag, however, as rates rise.” Citi economists wrote in a note for institutional clients.

According to the recent Commerce Department data, the aggregate household saving rate was revised up to 6.7 percent of disposable income.

The higher level suggests that consumers today are well positioned to maintain or even increase consumption, said Federal Reserve Vice Chairman Richard Clarida, in his first public remarks on Oct. 25 at the Peterson Institute for International Economics event.

This is contrary to the previous economic expansion from 2001 to 2007 when consumers were borrowing to maintain consumption while their income growth weakened.

“To me, at this stage in the business cycle, a historically high household saving rate is a tailwind for the economy, not a headwind. And, of course, recent reductions in personal income tax rates are also a tailwind for the economy,” Clarida said.

However, there are a few troubling signs, he said, in today’s announcement including housing spending, business spending, and declining U.S. exports.

The business spending growth slowed down to 0.8 percent, with spending on structures going down as much as 7.9 percent.

“While business spendings vary substantially quarter over quarter, the slow down came earlier than expected by many economists as a sign of the fading impact of corporate tax cuts and fiscal stimulus,” he said.